COAALA: A Novel Approach to Understanding Extreme Stock-Bond Comovement

Anne-Florence Allard, Hamza Hanbali*, Kristien Smedts

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

This paper proposes a novel copula model to understand the dependence between extreme variations in stock and government bond returns. This model is used to introduce a tail-based extension of the safe haven concept, which we refer to as a tail risk dampener. Our findings reveal significant cross-country differences in stock-bond local tail dependence and tail risk dampening abilities. Some countries’ bond market can lessen the impact on portfolio returns of extreme negative stock returns, while for others no such negative tail comovement is found. This tail comovement is also not always aligned with global comovement between stocks and bonds. The paper concludes that a comprehensive understanding of the comovement and the resulting diversification potential between stock and bond returns necessitates complementing global measures of dependence with local tail measures.
Original languageEnglish
JournalJournal of Financial Econometrics
Publication statusAccepted/In press - 29 Mar 2024

Structured keywords

  • AF Financial Markets

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